chap 2 Flashcards
Securities Markets:
markets that allow buyers and sellers of securities to make financial transactions
Money market:
the market where short-term debt securities are bought and sold
Capital Market
the market where long-term securities, such as stocks and bonds, are bought and sold; classified as primary or secondary.
Securities and Exchange Commission (SEC):
Federal agency that regulates the securities markets.
Primary market:
the market in which new issues of securities are sold to investors
Initial Public Offering (IPO):
the first public sale of a company’s stock
Public offering:
securities offered for sale to public investors
Rights offering:
shares are offered to existing shareholders on a pro rata basis
Private placement:
securities sold directly to select groups of private investors
Underwriting:
promoting the stock and facilitating the sale of the company’s shares.
Prospectus:
registration statement describing the issue and the issuer
Quiet period:
time period after prospectus is filed when company must restrict what is said about the company
Red Herring:
preliminary prospectus available during the waiting period
Road show:
series of presentations to potential investors
Investment Banker:
Financial intermediary that specializes in assisting companies in issuing new securities and advising firms with regard to major financial transactions
Underwriting
purchases the security at agreed-upon price and bears risk of selling it to the public.
Underwriting Syndicate:
group formed to share the financial risk of underwriting
Selling group:
other brokerage firms that help the underwriting syndicate sell the issue to the public
Secondary market (aftermarket):
the market in which securities are traded after they have been issued
National Securities Exchanges:
markets in which the buyers and sellers of listed securities come together to execute trades.
Over-the-counter (OTC) Market:
Involves trading in smaller, unlisted securities
Broker Market:
consists of national and regional securities exchanges. Trades are executed when a buyer and a seller are brought together by a brokerand the trade takes place directly between the buyer and seller
Dealer Market:
made up of the Nasdaq OMX and OTC trading venues. Trades are executed with a dealer (market maker) in the middle.
Sellers sell to a market maker at a stated price.
The market maker then offers the securities to a buyer
Designated market maker (DMM):
an exchange member who specializes in making transactions in one or more stocks ; job is to manage the auction process
Regional Stock Exchanges
Modeled after the NYSE, but membership and listing requirements are more lenient.
–Majority of securities listed here are also listed on NYSE
Broker Markets: what types of exchange happen ?
Options Exchanges
–Allows trading of options
–Dominant exchange is Chicago Board Options Exchange (CBOE)
Futures Exchanges
–Allows trading of futures
–Dominant exchange is the CME Group
Bid price:
the highest price offered to purchase a given security
Ask price:
the lowest price offered to sell a given security.
The Over-the-Counter Market (dealer market)
Includes mostly smaller companies that either cannot or do not wish to comply with Nasdaq’s listing requirements.
–Companies traded on the OTC Bulletin Board (OTCBB) are regulated and required to file audited financial statements and comply with federal securities law.
–Companies traded on the OTC Markets Group are not required to file with the SEC
OTC Markets Groups:
OTC Pink: unregulated; small, risky companies
- OTC QB: companies must provide SEC, bank, or insurance reporting and be current in their disclosures.
- OTC QX: reserved for companies that choose to provide audited financial statements and other required information
Third market
consists of over-the-counter transactions made in securities listed on the NYSE or one of the other exchanges
Large institutional investors go through market makers that are not members of a securities exchange
Institutional investors (mutual funds, life insurance companies, pension funds) receive reduced trading costs due to large size of transactions
Fourth Market
consists of transactions made through a computer network, rather than on an exchange, directly between large institutional buyers and sellers of securities.
Electronic communications networks (ECNs) allow direct trading.
–Most effective for high-volume, actively traded securities and play a key role in after-hours trading.
–Can save money because they only charge a transaction fee, per share or based on order size.
Bull market:
Conditions in security markets normally associated with rising prices, investor optimism, economic recovery, and government stimulus
Bear Market:
Conditions in security markets normally associated with falling prices, investor pessimism, economic slowdown, and government restraint
Long purchase:
transaction in which investors buy securities, usually in the hope they will increase in value and can be sold at a later date for profit.
–Object is to “buy low and sell high”
–Most common type of transaction
–Return comes from any dividends or interest received during the ownership period, plus the difference (capital gain or loss) between the purchase and selling prices.
Reduced by transaction costs
Margin trading:
Investors use funds borrowed from brokerage firms to make securities purchases.
Margin requirement:(for margin trading)
the minimum amount of equity that must be in the margin investor’s own funds. The margin requirement for stocks has been 50% for some time; set by the Federal Reserve Board.
Financial leverage:
the use of debt financing to magnify investment returns
Margin loan:
official vehicle through which the borrowed funds are made available in a margin transaction
Advantages of Margin trading
Magnifies returns
–Allows investors to spread their limited capital over a larger number of investments which promotes diversification
Disadvantages of Margin trading
Magnifies losses
–Cost of margin loan: the vehicle through which the borrowed funds are made available
•Interest rate usually 1% to 3% above the prime rate:the interest rate charged to creditworthy business borrowers
Margin account:
established to execute a margin transaction, an investor must contribute a minimum of $2,000 in equity or 100% of the purchase price, whichever is less, in the form of cash or securities.
Initial margin:
minimum amount of equity that must be provided by the investor
Restricted account:
account with equity less than the initial margin requirement
Maintenance margin:
absolute minimum amount of margin (equity) that an investor must maintain in the margin account at all times
Margin call:
Investor receives this when an insufficient amount of maintenance margin exists and then has a short period of time (few hour to few days) to bring equity up above the maintenance margin
Debit balance:
amount of money being borrowed in the margin loan
Uses of Margin Trading
Magnify returns
Pyramiding: uses the paper profits in margin accounts to partly or fully finance the acquisition of additional securities.
Excess margin:
more equity in the account than required
–Constraint: when additional securities are purchased your margin account must be at or above the required initial margin level.
–Risk associated with possible price declines in the margined securities
Short selling:
practice of selling borrowed securitiesInvestor borrows securities from a broker
Broker lends securities owned by other investors that are held in “street name”
Investor must make a deposit with the broker equal to the initial margin requirement applied to short-sale proceeds; broker retains proceeds from the short sale.
“Sell high and buy low”
Investors make money when stock prices go down
Advantages and disadvantages of short selling
Advantages
Chance to profit when stock price declines–
Disadvantages
Limited return opportunities: stock price cannot go below $0.00
Unlimited risks: stock price can go up an unlimited amount
If stock price goes up, short seller still needs to buy shares to pay back the “borrowed” shares to the broker
Short sellers never earn dividend income and must pay to the lender any dividends paid out during the short-sale transaction
